10 Year Report

The New Markets Tax Credit 10th Anniversary Report was prepared by the New Markets Tax Credit Coalition, a national membership organization that conducts research on and advocacy for the New Markets Tax Credit (NMTC). The purpose of this report is to evaluate the success of the New Markets Tax Credit as an incentive to private sector investment in low income urban and rural communities.

December 2010 marks the 10th anniversary of the enactment of the New Markets Tax Credit. The legislation was proposed by President Bill Clinton, who worked with House Speaker Dennis Hastert (R-IL) on a package of incentives aimed at boosting economic circumstances in communities left behind by the prosperity of the 1990s. At a time of record budget surpluses, the two leaders chose to use the tax code, rather than federal grants, as an economic development tool; an innovative approach that has now become standard.

The NMTC statute created a new category of investment intermediaries called Community Development Entities (CDEs). CDEs can include community development corporations, community loan funds and private financial institutions. They must have a track record in community or economic development and be accountable to local advisory boards. CDEs compete for annual allocations of New Markets Tax Credits. NMTC provides a 39% credit against federal income taxes to CDE investors. CDEs use the proceeds from this credit to make loans or investments with below-market terms and conditions to businesses operating in low income communities.

The Community Development Financial Institutions (CDFI) Fund of the Department of the Treasury administers the NMTC program. In September 2010 the New Markets Tax CreditCoalition filed a Freedom of Information Act (FOIA) request with the CDFI Fund, requesting data on transactions from the first allocation of tax credits in 2003 through the most recent round of credit allocations in 2009. The purpose was to understand the characteristics of thecommunities served under NMTC, the types of businesses receiving financing with the Credit and the overall cost effectiveness of the program.

The FOIA request produced data on over 4,000 transactions that financed close to 3,000 business enterprises. The NMTC investments and loans in those businesses totaled $15.5 billion and the total project cost for financing those businesses with additional private sector capital was almost $30 billion.

Key Findings

■ While the NMTC statute requires that projects be located in census tracts where the poverty rate is at least 20% or median family income does not exceed 80% of the area median, in fact, the preponderance of NMTC activity is in extremely disadvantaged communities with high distress factors far exceeding the minimum requirements in the law. Over 61% of investments are made in communities with unemployment rates exceeding 1.5 times the national average, 57% are in communities with poverty rates exceeding 30% and 60% of the investments are in places where median incomes are at or below 60% of area median.

■ Between 2003 and 2009 NMTC leveraged $8 in private investment for every $1 of cost to the government. The New Markets program generated over $30 billion in financing to businesses in low income communities.

■ NMTC financed a wide range of projects from the first supermarket in a generation in Southeast Washington, DC to a loan for a school in Florida, to a health center in rural Louisiana, a solar company in New Mexico, and a series of revitalization projects in Iowa, Michigan and Virginia. While a substantial portion of projects financed by the Credit were real estate – community facilities, industrial and commercial facilities, mixed-use buildings with affordable housing – many were non-real estate projects that provided financing to operating businesses for equipment and working capital.

■ Demand for NMTC far exceeds availability. Between 2003 and 2009, CDEs have requested a total of $203 billion in allocation authority since 2003, a demand of more than 7 times Credit availability.

■ In 2010, NMTC-financed projects have created or retained 70,000 jobs.

■ The vast majority of NMTC investments (73%) have been made in communities with at least one factor of higher economic distress than required by law (i.e. unemployment rates at least 1.5 times the national average, poverty rates greater than 30%, median income less than 60% of area median).